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ESG in our investment DNA

We explicitly employ ESG factor analysis to enhance long-term returns and better manage risks by correctly pricing environmental, social and economic risks and opportunities.

Our E, S and G data is largely drawn from regularly reported primary sources. We map material E, S and G risks and opportunities as part of our fundamental research, using a combination of ESG frameworks, risk measurement tools and red flag indicators. Our ESG appraisal system is both quantitative and qualitative and complements bottom-up financial analysis to reinforce the thesis behind each investment.

We review sustainable business practices and assess the development of each company's operational efficiency through better management of natural resources such as water and energy, efforts to minimise waste, and cost reduction strategies which enhance productivity.

To discern the ESG credentials of a prospective investment we ask three questions;

  • Has the company identified material ESG issue relevant to its business?
  • Has the company done the work to assess these issues and incorporated their implications into its strategy?
  • Has the company adequately informed on its approach to sustainability and its influence on strategy?

Rather than rely on third-party data providers, which are often inconsistent, we use our Proprietary Investment Sustainability Mapping (PrISM) system, which draws from organisations that expend considerable resources developing and setting comprehensive global standards, which identifies and evaluates financially important ESG risk factors.

Specifically, we draw on the work of the Task Force on Climate-related Financial Disclosures (TCFD), the Sustainability Accounting Standards Board (SASB), the Greenhouse Gas (GHG) Protocol Standards, and other sustainability reporting standards specific to certain businesses. We adopt a reporting framework, developed from these standards, and use international accounting tools (e.g IFC, WWF, GRI) to assess disclosed climate change risks and opportunities affecting our investee companies. We then apply our own scores to each investee company, based on this analysis, which we use to rank their ESG performance.

Benefits of our approach

Adaptable

Our ESG investment process is governed by a disciplined approach to ESG risk factor assessment and analysis. Collaborative discussions help integrate individual views in establishing a cohesive set of guidelines, designed to remove subjectivity wherever possible, allowing Equitile’s Investment team to remain faithful to the core tenets of our investment philosophy.  The definition of what is material is dynamic, it is not uncommon for an immaterial factor to become material and so consistency and systematic tracking of historic ESG data and trend analysis is fundamental to our approach. 

Engaged

We admit no company onto our list of approved investments without it having already met our ESG standards. Once on our approved list, companies are monitored on an ongoing basis. If we remove a company from our approved list due to a breach in ESG standards, we will engage with the company to explain what aspect of their behaviour we find unacceptable. In this way, over time, we aim to contribute to rising ESG standards overall.

We exercise proxy voting obligations as an important right of shareholders, with a view to enhancing our clients' long-term investment values. We utilise our voting rights to hold company boards to account on the extent to which they are protecting the interests of shareholders and growing their businesses in a responsible and sustainable manner. Our goal is to reduce risks and enhance corporate governance practices.

Exclusive of unethical conduct

We especially seek to avoid companies causing unnecessary environmental and social damage such as through the unnecessary extraction of highly polluting fossil fuels, pornography, exploitative financial practices such as payday lending, gambling, the manufacture and sale of controversial weapons, civilian firearms and tobacco. Whilst we do not opt for full-fledged fossil fuel divestment, we place emphasis on an ESG momentum approach such as investments driving innovation and introducing new products in renewable energy and negative emissions technologies.

ESG Mapping in Practice

Our Proprietary Investment Sustainability Mapping (PrISM) scoring methodology is designed to help focus our attention on companies with strong ESG propositions that address climate change with mitigation, adaptation, or resilience measures. Through PrISM, ESG is fully integrated into the investment process at the research, evaluation and portfolio construction stages. Regular review is conducted to assess the potential for rerating and derating in valuation which can lead to rebalancing of portfolios. We aggregate ESG risk factors to understand the correlation of these specific risks across our portfolios as well as to discern the possible impact of extraneous events.


What does PrISM do?

 

The launch of the UN Principles of Responsible Investment and the UN Global Compact of shared values and principles have resulted in irrevocable advances in implementation metrics. Equitile’s approach to making sense of company disclosures and the metrics that stem from these is integral to our equity research process. For us, they are critical to an understanding of corporate resilience and the potential for achieving good risk-adjusted long-term returns.

PrISM allows us to systematically extract the value of more than 3,000 disclosures made annually by our investee companies related to their ESG impact, and their contribution to various sustainability targets, and embed this value into our investment decisions.

What is PrISM built on?

Task Force for Climate-related Financial Disclosures (TCFD)

The Financial Stability Board’s Task Force for Climate-related Financial Disclosures (TCFD) developed recommendations for more effective climate-related disclosure which enable stakeholders to better understand exposure to climate-related risks. We deploy the TCFD framework for understanding the physical and transitional risks associated with climate change and the transition to a net-zero emissions economy.

Greenhouse Gas Protocol Standards (GHG)

We are especially focussed on our portfolio companies’ carbon intensity (carbon footprint). PrISM systematically maps each of their disclosures, and track record, based on the GHG (Greenhouse Gas) Protocol’s Scope 1, Scope 2 and Scope 3 emissions categories. This mapping allows us to focus on areas of the portfolio where there is room for improvement. The greenhouse gas protocol standards are now the most widely used accounting tools to track greenhouse gas emissions. With a fast-evolving regulatory landscape, stranded assets are a key corporate risk. Stranded assets are assets that have suffered from unanticipated or premature write-downs, devaluations, or conversion to liabilities. They can be caused by a range of environment-related risks and these risks are poorly understood and regularly mispriced. We focus on greenhouse gas intensity reduction disclosures to reduce the risk of stranded assets in our client portfolios.

Sustainability Accounting Standards Board (SASB)

We use materiality maps from the Sustainability Accounting Standards Board (SASB) to give us a comprehensive, deep knowledge of broader identified issues to build a full picture of any company’s long-term resilience. This guides the scores our companies attain in terms of both the likelihood and magnitude of impact of issues that arise within their framework.

Sustainable Development Goals (SDGs)

Through its Sustainable Development Goals (SDGs), the UN has encouraged the world’s largest and most successful companies to join forces to tackle some of the greatest global challenges, such as universal human rights, anti-corruption and climate action. We map SDGs for investee companies to understand our portfolios companies’ alliance and contribution to achieving SDGs. This ensures we have a view on delivery mechanisms and are able to monitor progress towards achievement. During portfolio construction we use derived metrics to help shape the portfolio towards desired outcomes.

For further details on our investment approach, please contact info@equitile.com 

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